Government Budget and National Saving
Paradox of Thrift
- The paradox of thrift tells us that higher savings are ________ in the short run (because lower spending and GDP) but ________ in the long run.
- This is because if we save more money in the banks, they have more money to lend out to firms that can use that money to invest in capital goods (machines) that allow GDP to grow in the long run.
National Savings
The national savings are the private savings plus the public savings.
Example: If the national income is $1000, the consumption is $300, tax revenue is 400 and government expenditure is $250, what will the private, public and national savings be?
Private savings = ________
Public savings = ________
National savings = ________
- Budget Surplus - when tax revenue is greater than government spending
- Budget Deficit - when tax revenue is less than government spending
In a closed economy (no exports or imports) at equilibrium remember:
and rearranging the above equation gives us:
or :
Example: Paradox of Thrift
Accumulating capital:
a. allows society to consume more in the present
b. has no tradeoffs
c. requires society to sacrifice consumption goods in the present
d. decreases savings rates
e. both c and d
C.
When we save more, banks have more money to loan out to firms that spend it on capital (accumulation). To have higher savings means we have to spend less on consumption.